I watch the ISE Sentiment Index very closely because I’ve found it to be an excellent indicator. This is how the ISE describes it:

The ISE Sentiment Index (ISEE), which was introduced in December 2003, measures opening customer buy transactions in call and put options.The ISE Sentiment Index (ISEE) is designed to show how investors view stock prices. The ISEE only measures opening long customer transactions on ISE. Transactions made by market makers and firms are not included in ISEE because they are not considered representative of market sentiment due to the often specialized nature of those transactions. Customer transactions, meanwhile, are often thought to best represent market sentiment because customers, which include individual investors, often buy call and put options to express their sentiment toward a particular stock.

So it’s a great “dumb money” put/call ratio. Let me explain how I use it. When the put/call ratio goes above “1,” meaning that more than one put is being bought for every call, I know there’s a lot of fear in the market and I want to be a buyer. The last time this happened was in September/October 2004 — a long time ago! Public sentiment has been positive for a good long time now, but I’m patient and pick my spots carefully.

Back in September/October 2004 the Energies were the strongest sector of the market, so buying the Energy SPDR (XLE) or the Oil Service HOLDR (OIH) was a good idea then. You have to look to buy strength within weakness (no, that isn’t a zen koan). Here are the charts: